Canada Housing Trust, Royal Bank of Canada sell debt; quarterly auctions to skip 30-years

By Cristal Cody

Prospect News, Dec. 16 - Canada Housing Trust sold C$6 billion of 2.75% mortgage bonds, while the Royal Bank of Canada sold $200 million of fixed-to-floating-rate notes at par, according to sources.

Volatility continued Thursday in OPTI Canada's bonds, traders said.

Also in Canadian securities, the government announced plans to hold eight auctions of Government of Canada bonds in the first quarter of 2011. All eight auctions are in short-dated maturities.

The first auction of five-year bonds is scheduled on Jan. 12.

"It's in line with what we've seen recently, but it's notable because there won't be a 30-year issue and that's a little out of keeping with the norm," said Eric Lascelles, chief Canada macro strategist at TD Securities in Toronto.

"It seems the government is shifting down more to the three-year to five-year sector for the focus of issuance," he said. "I think we'll see more changes as we get further in 2011 - scaling back issuance but there's no evidence of that here. The government is just trying to maintain consistency so as not to rock the market."

Canadian bonds closed higher in line with stronger U.S. Treasuries on Thursday.

The Canadian 10-year bond yield fell to 3.267% from 3.32%. The two-year note yield closer lower at 1.692% from 1.71%.

U.S. Treasuries bounced back slightly on mixed economic data and the Federal Reserve's purchase of $6.78 billion of bonds. The yield on the 10-year Treasury note fell to 3.42% from 3.54%, while the two-year note yield dropped 3 basis points to 0.65%.

Canada Housing Trust prices

Canada Housing Trust sold C$6 billion of 2.75% Canada mortgage bonds due Dec. 15, 2015 at 99.774 to yield 2.799% on Thursday, an informed source said.

The bonds priced in line with guidance at a spread of 26.5 bps over the Government of Canada benchmark.

Bond traders were "treading water here waiting for the Canada mortgage bond issue," a source said. "It's the quarterly bond issue that comes every December."

The notes were sold under Rule 144A.

TD Securities Inc. was the lead manager.

Canada Housing Trust is the financing arm of Ottawa-based Canada Mortgage and Housing Corp.

RBC taps market

The Royal Bank of Canada sold $200 million of 0.77% three-year fixed-to-floating-rate notes at par, according to an FWP filing with the Securities and Exchange Commission.

The non-callable notes (Aa1/AA-/AA) have a fixed-rate coupon until Dec. 20, 2011 and then a floating rate of three-month Libor plus 23 bps until maturity.

RBC Capital Markets Corp. was the bookrunner.

The financial services company is based in Montreal and Toronto.

OPTI gyrates in trading

Volatility reigned in OPTI Canada debt, as the bonds "traded all the way down and then all the way back up," according to one trader.

He saw the 7 7/8% notes due 2014 closing around the 64¼ level, up from the day's low around 63 but down from highs around 66. The 8¼% notes due 2015 meantime ended around 65, versus the low of 64 and the high of 68.

The 9% notes due 2012 closed at 98¾ bid, 99 offered.

Another trader said the debt was "still active," seeing the 7 7/8% notes trade up to 66 before settling back in around 64, "about unchanged." The 8¼% notes climbed up to 67 before backing off to 65, which he said was up half a point.

"There is going to be a lot of that [price movement] going on," the trader said, as the market tries to figure out what the company will do to improve its balance sheet.

At another desk, a trader said that OPTI Canada has been "one of the big trouble spots."

He cited financial market talk of Nexen Inc., the 65% owner of the Long Lake, Alta.. oil sands energy joint venture 35% owned by OPTI "having some issues" as well as the possibility that Nexen, up till now investment-grade rated, could be dropped into Junkbondland.

Moody's Investors Service last week warned that it may cut Nexen's Baa3 rating to below investment-grade, citing the company's continued high debt level coupled with the prolonged ramp-up of production at Long Lake. Meantime, Calgary, Alta.-based OPTI's own ratings were cut on Tuesday by Standard & Poor's.

He also cited talk that "the actual quality of the oil sands is less desirable than they had originally thought, and it was taking a lot more money to get the stuff out."

Nexen and OPTI's big and costly new facility is designed to extract bitumen, a heavy, viscous grade of crude oil, from the ground by heating it up via a proprietary process, and then turning the rubbery goo into the more desirable and saleable light, sweet crude oil. Executives from both OPTI and Nexen recently made presentations to investor conferences during which they said that Long Lake's anticipated bitumen output in 2011 and 2012 would be less than originally projected.

"It's turning out to be a lot more expensive than they anticipated, and so the bonds have been suffering," the trader said. He saw OPTI's 9% first-lien senior secured notes due 2012 trading as low as 98½ bid, versus recent levels above par. "It's a really short maturity, and those bonds were considered money-good."

He also saw its 7 7/8% second-lien secured notes and 8¼% senior unsecured notes, both due 2014, falling further down into the 60s.

The latter two bonds, he said, "traded today with a brief period of strength in the middle of the afternoon," pegging them up around the 66-67 bid range, before falling back later on to end around a 63-65 context, about where they had traded on Wednesday, also in busy dealings.

Another trader said that the OPTI bonds "were all over the map - first they were actually up for a while, and then they faded near the close." He called the bonds "incredibly active."

The first trader meantime said "we heard that there was a big seller around a couple of weeks ago, and it seems like guys are trying to sort of throw in the towel on the thing."

Of course, he also noted that "the flip side is that guys are saying that all of the information that people are bandying about now is information that's been out there, and its not necessarily new news."

He opined that "I think the Nexen news [i.e., whether the company gets downgraded or not] is really the key to that situation -and it's also a year-end thing. There's very little liquidity and it's pretty much a Canadian name, so there's a general malaise in the market and nobody really wants to do anything" to bring the OPTI bonds back up.

Andrea Heisinger, Paul Deckelman and Stephanie N. Rotondo contributed to this review

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